With the US and European crises behind them, South American trade figures are back on an upward slope. Local banks are paving the way for improved relations with China, and Chinese banks are increasing their presence in the region. Even the proximity of the US could have its benefits.

Latin American trade flows may have recovered after a succession of crises in the US and in Europe, but growth looks set to remain modest. Imports are growing faster than exports, as links with Asia are being strengthened. Latin American foreign sales are expected to increase by a mere 1.5% this year (roughly in line with the 1.4% expansion registered in 2012 compared with the previous year), according to the UN’s Economic Commission for Latin America and the Caribbean. Meanwhile regional imports are more vigorous, expected to expand by 4.5% in 2013.

Several Latin American banks have rushed to set up regional trade finance desks in China, as trade winds continue to blow eastwards. Indeed, last year, Chinese sales to Latin America grew by 11% to reach $131bn, compared with a 5% increase in Latin American exports to China, which totalled $125bn. Asia accounted for a mere 13% share of Latin America trade with the rest of the world in 2005. That figures is now 25%, according to Citibank. This is roughly level with North America’s current share, which has dropped from 35% to 24% between 2005 and 2012.

“The US was affected a lot,” says Renato Faria, Citibank’s trade head in Latin America. Meanwhile, there was little change in European and in intra-regional trade flows, he adds.

Magnus Montan, HSBC’s regional head of global trade and receivable finance, adds: “We are seeing a greater development towards Asia; Asian exports from Brazil are likely to grow by 12% per annum between 2016 and 2020.” 

Overseas postings

“Clearly the trade corridors are changing. China now is the most important trade partner to Brazil... A bank with a global footprint that understands other cultures, that knows how to deal with countries such as China, will have a competitive advantage for trade flows in the future,” says Gustavo Castro, Citibank’s foreign trade head in Brazil. The bank’s Peruvian subsidiary issued Citibank’s first import letter of credit denominated in renminbi in Latin America at the beginning of October. Meanwhile, Citibank set up a Latin America/Asia desk in Shanghai in 2012. 

HSBC has also posted two former Latin America staff to Shanghai to improve customer relations with China. “Their role is to help Latin American companies that are on the ground in Asia, providing advice and services to them there. More importantly, to be the link with our relationship managers and our business development managers who cover clients here in Latin America,” says Mr Montan, who used to be based in Shanghai and Hong Kong.

“These companies do not necessarily have an overseas presence, but the fact that we have people on the ground there, that they speak the same language as our customers here, they can have access to a trade specialist in Shanghai, this helps to understand how the Chinese importer thinks, how the regulatory environment works,” he adds.

Local knowledge

Nevertheless, the focus is trading in local currency, as HSBC believes that the renminbi is going to become one of top three currencies in the future and represents a very significant part of overall trade with China. “We have now done more than a 100 deals in renminbi across Latin America – in Mexico, Brazil and Argentina – and this includes both letters of credit and trade financing and foreign exchange,” says Mr Montan.

“One area that we have focused on a lot in the past 12 months or so is the use of the renminbi as a currency for trade to help Latin American companies understand how to use the renminbi instead of the US dollar. We are able to offer the same products we offer in dollars in renminbi. We have letters of credit, we have trade finance, we have guarantee products that can be offered in renminbi.”

At the end of 2012, HSBC conducted a survey of 600 corporate customers in China and asked them whether they would be willing to offer a better price if their overseas trading partner was prepared to trade in renminbi instead of US dollars. “More than 50% said they would see value in that. They would be able to offer a better price,” says Mr Montan.

So is this an irreversible trend? “We believe it is still very early days. It is a new business and it will take time for companies to get used to it," says Mr Montan. "However, I have noticed an increase in interest among companies and customers in Latin America to talk about the use of renminbi. I came with a delegation from China two years ago to talk about this, and we are now seeing much more interest than we did in 2011. Companies start to see the benefit of this.”

And bypassing the dollar helps to save on costs, according to many banks. “When you think about it, it makes sense if you have a Brazilian exporter and a Chinese importer, you have got all your receivables and your other costs in renminbi, and on the Brazilian side you will be dealing in Brazilian reais. So by eliminating one currency, there are potentially costs to save,” says Mr Montan.

Moving in

Chinese banks have also assumed a greater presence in Latin America, notably in Brazil, where China Construction Bank agreed to pay $740m for a 72% stake in Banco Industrial e Commercial in late October 2013. “The Chinese banks that have now come to Brazil, either through acquisitions or with banking licences, have a plan to expand,” says Claudia Lopes, head of international division at Banco Pine, a Brazilian corporate bank. “When this expansion will take place remains [unknown]. I assume part of this will be in the agribusiness sector, but I am not [entirely] sure of their business model so far.”

Celso Nunes, BNP Paribas’ head of global transaction banking for the Latin American southern cone, sees this as the beginning of a trend, as Chinese banks are bound to have a lasting impact on trade finance. “If I was sitting in their chair, they know the clients there, they know their market, they can go there and grab the forces; it is exactly their strategy,” he says. 

Meanwhile, Citibank executives feel that this is more of a long-term issue. “Chinese banks are still new to the market, they have just arrived,” says Mr Faria. “It is going to take them some time to know the market, to build a relationship. They are going to compete against us in the future, but I do not see them as a threat.” 

He also notes that European banks are back in business in regional trade finance. “Since the second half of 2012, markets are coming back to normal in terms of liquidity, most of the European banks are back providing liquidity for trade,” he says.

Europe bounces back

Santander Brasil, which lost market share due to the eurozone crisis, is one such bank bouncing back in its main Latin American market. “We have registered a 30% increase this year in trade operations,” says Miguel Angel Ocerin, managing director of trade, export and commodity finance at Santander Brasil.

“We basically used to manage corporate credit risk of the importer of the asset. If you look at our pipeline in export finance, more than half are actually project finance, based on short-term export finance contract guarantees... Brazil has this great investment programme in infrastructure, we have a great potential in this area,” he adds.

BNP Paribas launched a three-year plan last year. “In trade finance, we expect to more than double the size of the business,” says Mr Nunes. “The main focus is to support the multinational companies that come from where we have an important presence – Europe, Asia and the US. In a country such as Brazil, I would say that 50% of gross domestic product is generated by multinational companies. It is an important part of the business.” 

Mexico’s gain 

While the immediate outlook in the US may seem uncertain, Mexican exporters should ultimately benefit from improving conditions in the country, with growing demand from the US. “That Mexico-US corridor, which is already one of the most important trade corridors in the world, will grow," says Mr Montan.

“We see that in dialogues with companies, in terms of Mexico as a location for foreign direct investment, particularly as costs in China have gone up – cost of manufacturing, cost of labour, cost of land coupled with the cost of transport. All of this makes Mexico an attractive place for investors to build manufacturing capacity. On the one hand you have access to the North American market, the biggest consumer market in the world, but you also are strategically well positioned for [taking advantage of the] growing demands in Latin America.”

As crises come and go, trade financiers in Latin America believe they still have exciting times ahead of them. “A few years ago, some people were saying trade finance is going to disappear because of capital markets, and that the free market will substitute classic trade. What we can see now is that nothing like that happened,” says Mr Nunes. “Even in a country such as Chile... trade financing still plays a very important role. Financing the [trade] flows are a very important part of its companies’ business.”

Citibank’s Mr Faria adds: “There may be good times or bad times, but we are going to be [in Latin America] because we have something different to offer.”


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